Brooklyn Bagel is an all equity firm that is planning an expansion into the other boroughs. Prior to the expansion its perpetual expected earning is $20 million and it has 10 million outstanding shares. Assume all earning are paid as dividends. The expansion is expected to cost $20 million and will add to annual earning $5 million in perpetuity. The expansion carries the same risk as the current business. Current required rate on equity is 10%. Assume no taxes.

A. Construct BB market value balance sheet and compute the share price.

B. If they decide to follow through with the expansion and finance it with equity:

1. Construct BB market value balance sheet after the announcement only and compute the new share price.

2. How many shares do they need to issue?

3. Construct BB market value balance sheet after the equity issue but before the investment.

4. Construct BB market value balance sheet after the investment is made.

5. What is the value of BB ?

C. Suppose they decide to borrow the $20 million at a cost of 8%.

1. Construct BB market value balance sheet after the announcement only and compute the new share price.

2. Construct BB market value balance sheet after the debt issue but before the investment.

3. Construct BB market value balance sheet after the investment is made.

4. What is the value of BB?

5. Calculate the equity required rate of return after the debt issue and the launch of the new investment.

6. Compute the weighted average cost of capital after the debt issue and the launch of the new investment.